The Ultimate Interest-Only Loan Quiz

An interest-only loan has both advantages and disadvantages, depending on who you are, what you want and how disciplined you are. For starters, check out your discipline skills by taking this quiz.

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Question 1 of 20

In what years was the biggest housing boom in the U.S. since the 1950s?

1995-2000

2001-2005

The biggest housing boom in the last 50 years was between 2001 and 2005.

2005-2009

Question 2 of 20

Two factors contributed to the new era of construction and rebuilding. What were they?

low interest rates and new-found wealth

The two factors were low interest rates and new-found wealth from the booming hi-tech industry.

cheap labor and an abundance of construction materials

large bank loans and inexpensive raw materials

Question 3 of 20

During the housing boom of the years 2001-2005, who were lenders willing to lend money to for housing loans?

the unemployed

poor people only

any gainfully employed person

In those days, lenders were willing to lend money for housing loans to anyone who was gainfully employed.

Question 4 of 20

With regard to a home mortgage, there are two parts: the principal and the interest. How do they differ?

principal = the standard you go by; interest = how much you are interested in taking out the loan

interest = the amount of the loan; principal = the "fee" for the loan, spread out over a few years.

principal = the amount of the loan; interest = the "fee" for the loan, spread out over a few years.

The principal always refers to the actual loan, whereas the interest is the fee you pay, which is spread across a few years until the loan is repaid.

Question 5 of 20

What is the common duration of an interest-only loan?

two to five years

five to 10 years

Most interest-only loans are for five to 10 years.

10 to 15 years

Question 6 of 20

How long have interest-only loans been in existence in the U.S.?

for nearly 80 years

Interest-only loans have been around since the 1920s.

for 50 years

for 30

Question 7 of 20

If you want to repay part of the principal when you like, is there a penalty with an interest-only loan?

yes

no

No, that is one of the advantages of the interest-only loan. There's usually no penalty for repaying the loan early.

it depends on the lender

Question 8 of 20

With an interest-only loan, monthly payments are usually much less than with a fixed-rate:

mortgage

The amount you pay per month is usually much less than with a fixed-rate mortgage.

principal

fee

Question 9 of 20

What is "fixed" about a fixed-rate mortgage?

the principal, which is set according to the housing industry

the interest rate, which is set for the duration of the loan

Under a fixed-rate mortgage, the interest rate is fixed or set evenly across all the months of repayment.

the eligibility of the borrower, which is set according to certain criteria

Question 10 of 20

What is the formal term used for the process of periodic payments over time?

periodicity

amortization

It's called amortization, which is a process of monthly calculations and recalculations to spread the loan payments over a period of time.

calculation

Question 11 of 20

Under an interest-only (IO) loan, initially your monthly payments cover the interest only and are quite low. What happens after that?

The IO part finishes and your loan is virtually paid up already.

The IO part finishes and you're left with having to pay off the principal over many more years.

The IO part finishes and you're left with having to pay off the principal over fewer years.

In the beginning under the IO loan, you pay lower payments. When the IO part finishes, you actually have to pay off the principal, but over fewer years than with a fixed-rate loan. This means your payments will now be quite high.

Question 12 of 20

Which of these would be likely to benefit from an IO loan, whereby payments are low at first but high later on?

people who expect a pay raise in the coming years

People who expect to increase their salary in the foreseeable future would likely benefit from an IO loan.

people who can't deal with large sums of money

people who are cautious yet generous

Question 13 of 20

Why do people with a fluctuating income find an IO loan useful?

because they don't need to pay anything whenever their monthly income dips below a certain point

because they only pay something when they can afford it

because they can repay part of the principal when they are able to, without penalty

Those people who have a fluctuating income are very suited to an IO loan, because they can pay off the principal whenever they are able to, without incurring a penalty.

Question 14 of 20

With an IO loan, are people more likely or less likely to buy a "starter" house?

neither, it has no bearing

more likely

less likely

Actually, they're less likely to buy a "starter" house, because the terms of the IO loan are conducive to first homeowners, allowing them the possibility of "jumping" straight to a bigger house.

Question 15 of 20

How do some people invest their money that they've saved from an IO loan?

If your home is not expected to increase in value, should you take out an IO loan?

probably not

This one's probably a no-go. Any wise person who doesn't expect his home value to increase (not to mention his salary), should avoid an IO loan.

yes, definitely

yes, as long as your income is expected to remain stable

Question 17 of 20

How do adjustable-rate mortgages work?

They have a long-term fixed rate, then an adjusted rate that remains set till the last payment is made.

They have a short-term fixed rate, then an adjusted rate that changes from time to time.

Adjustable-rate mortgages are only fixed for a short time. After that, they are adjusted, sometimes again after a period of time.

They have a short-term fixed rate, then an adjusted rate that remains set till the last payment is made.

Question 18 of 20

They say that adjustable-rate mortgages (ARMS) are risky. Are they?

Only if you don't know what you're doing.

No. Who told you that, anyway?

Yes, because you're taking a gamble that the loan rate will go down.

ARMS are indeed a little risky, because you're taking a chance that the loan rate will decrease.

Question 19 of 20

If you want an IO loan to work for you, what's the single most important factor to make it a success?

fiscal discipline

Fiscal discipline is the most important factor in making an IO loan work. This entails using your cash wisely and trying to pay off the principal whenever you have the opportunity, instead of squandering the money.

good connections with your broker

an excellent command of mathematics

Question 20 of 20

What is meant by "payment shock"?

the realization that you have to start paying something every month

the stark reality that once your IO loan has expired, you now have high monthly payments for the duration of the loan

Payment shock usually sets in at the end of the IO loan, when you are faced with having to make high monthly payments for whatever principal remains.

the sudden shock of having to pay, whereas you were hoping you wouldn't